HT Image
HT Image

Home and the World

India should focus on going where China cannot go, rather than focusing where it has already been, writes Daniel H Rosen.
By Daniel H Rosen | None
UPDATED ON FEB 20, 2008 10:20 PM IST

India has moved up to Division A in the world economy with three consecutive years of 8 per cent-plus growth. Both Indians and foreigners will benchmark the country’s economic performance not against the past, but against the leading emerging markets, foremost of which is China. On the World Bank’s business environment indicators for 2008, India moved up 12 places in the ‘Doing Business’ category, 26 places in ‘Getting Credit’, and a stunning 63 places in ‘Cross Border Trade’. Many in China debate whether they have underestimated India’s competitive potential. Are we overestimating how much India has to learn from China?

If it sometimes seems incredible that China can grow so quickly without creating weak links in the economic chain, it isn’t true — there are many weak links. The problems can be seen both structurally, in the model of China’s approach to development and in the marketplace where firms compete. Economic output is the product of a mix of inputs: land and resources, labour and capital. A country’s natural endowment of these inputs and the efficiency with which businesses mix them together determine its competitiveness. In terms of useful land, China is not well endowed relative to its population size and the productive value of what land there is has declined significantly as a result of the choice to keep production costs low at the price of a future environmental crisis. Environmental costs are already starting to push up China’s operating costs noticeably. Impressive Chinese manufacturing competitiveness looks less impressive once you take basic environmental compliance into account. In terms of natural resources, China is well endowed only with coal. In terms of everything else, China’s input costs are as high as — or higher than — everyone else’s. This certainly goes for usable water too.

In terms of capital, it might seem at first glance that China is well endowed. But for the economy as a whole it is not just sheer volume of household savings, foreign exchange reserves and net profits at protected State-owned companies that count, but whether the financial intermediation system is any good at getting that capital to the firms that can use it best. On this score, China is in a sad shape. Financial flows build up overcapacity in some sectors and undercapacity in others, while households suffer from negative real deposit rates for the use of their $ 2.3 trillion in life savings. Pensions and healthcare are not provisioned. Liabilities at the banks have had to be bailed out time after time. And once the current profit cycle turns down — after all, China has business cycles like the rest of us — a new wave of non-performing loans is likely to arise.

It is obvious that China is richly endowed with a labour force. Now, whether it is utilised efficiently is another question. Unskilled labour was so abundant in the past that many manufacturers chose archaic modes of making stuff rather than invest in technology and innovation. That choice has brought its own problems, as many manufacturers are finding it hard to compete in the face of even moderate wage inflation. But moreover, by directing the bulk of investment into heavy industry instead of labour-intensive light industry and services, China is not growing according to its best advantages. The five biggest energy users in China — steel, cement, aluminum, glass and chemicals — employ fewer people today than they did ten years ago, and fewer people than the service sector in Guangdong province alone. China’s labour advantage simply doesn’t accrue to most of the best known Chinese firms.

Lax intellectual property rights protection has created an economy with a questionable ability to deliver real hi-tech innovation close to the frontier. Much of what passes for hi-tech in China is actually a modest adaptation of existing technology, often involving piracy. Where more significant innovation is taking place, it is usually owned and operated by foreign enterprises. This is good for China, no doubt. But it is not the same thing as booming indigenous innovation. The lack of a regulatory culture produces weak quality controls, which has made building Chinese brands difficult. Concerns about lax products standards have lately tarnished Brand China itself.

Corporate governance remains merely an aspiration. Shareholders have no illusion that managers of their firms will fulfil a fiduciary duty to deliver maximum shareholder value: the prevailing philosophy of investing not being a fundamental value but insider trading (with numerology being popular one too).

Generally, the home-court bias against individual rights (like rules against class action lawsuits over product defects) and in favour of corporate interests has ill-prepared Chinese firms to be ‘customer-facing’ downstream from the manufacturing process alongside firms accustomed to operating where the consumer is king. This partly explains why despite their manufacturing prowess, most Chinese firms leave the lion’s share of profit margins to foreign distributors and retailers. This could change over time, but it will likely be a decade or more before Chinese policy favours consumer welfare over producer welfare.

The fact that China has weaknesses doesn’t make the comparative advantages for India obvious. It does suggest where the path of least resistance lies. Even based on a casual appraisal one can see areas where India is positioned to build its international position. India has achieved high recent growth despite a daunting array of infrastructure failings, low economies of scale in production, bureaucratic delays and political frictions. If India can grow with such burdens, then growth should be accelerated with relatively straightforward reforms.

With labour pressures mounting in China, international marketspace previously saturated with Chinese output is starting to open up. Factories are decamping from Guangdong and Xiamen to Vietnam and the Caribbean. India can be a giant part of this story. Textiles and apparel have been China’s staple. But they were Britain’s, America’s, Japan’s and South Korea’s in succession until they fell pray to the same wage inflation China faces today. In more capital intensive production as well, China’s factor endowments are no better than India’s. A multitude of factors are combining to encourage Chinese firms to migrate to Brazil and Saudi Arabia so as to be closer to raw materials. Importantly, by avoiding the trap of industrial sector over-development that China has fallen into, India can continue to enjoy high international prices for its iron ores, avoid future environmental clean-up costs, dodge some of the producer price inflation China now faces, mitigate (though not eliminate) energy security anxieties, and lessen the impact a post-Kyoto climate agreement would have on economic growth.

Corporate interests masquerading as nationalism have tempted Beijing to block several inward foreign investments recently. In 2008, India may surpass China in terms of foreign investment as a share of total investment: the annual current flow of $ 15 billion could be doubled or tripled in the years ahead if India demonstrates that its pro-growth policy is here to stay. China passed the $ 15 billion mark in 1992 and by 1993 was at $ 39 billion, by 1996 $ 55 billion.

India can focus on going where China cannot go, rather than focusing where it has already been (read: heavy industry). Upstream from manufacturing lies innovation, which weak intellectual property protection makes difficult in China. And downstream lie high-value, customer-facing businesses that Chinese firms have major trouble developing. The heavy industry that so mesmerises Beijing creates pollution, not jobs. It would be a pyrrhic victory to beat China at this game, even if India could.

These are just a few of the opportunities for honing India’s competitiveness vis-à-vis China today. As China grapples with adjusting its growth model this year in light of serious inflation, a stock market correction, continued exchange rate appreciation and rapidly rising production costs, India will no doubt identify other chances to improve competitiveness as well. The key will be to learn not just from what China does best, but from what it does less well too.

Daniel Rosen is a Visiting Fellow at the Peterson Institute for International Economics in Washington DC. He is also an Adjunct Professor at Columbia University.

SHARE THIS ARTICLE ON
Close
A case of criminal conspiracy, abetment of offence punishable with death or imprisonment of life under the Indian Penal Code sections 120B and 115 was registered at RK Puram police station.(HT Archives. Representative image)
A case of criminal conspiracy, abetment of offence punishable with death or imprisonment of life under the Indian Penal Code sections 120B and 115 was registered at RK Puram police station.(HT Archives. Representative image)

2 held for ‘conspiracy’ to kill activist Sushil Pandit

By Karn Pratap Singh, New Delhi
PUBLISHED ON FEB 28, 2021 04:13 AM IST
The two were arrested Friday from RK Puram with four firearms, including two pistols of a foreign make, four cartridges, and a mobile phone containing the photograph of Pandit, which was allegedly provided to them by the jailed murder accused, Prince Kumar alias Tuti.
Close
FILE PHOTO: A smartphone with the Netflix logo lies in front of displayed "Streaming service" words in this illustration taken March 24, 2020. REUTERS/Dado Ruvic/Illustration/File Photo(REUTERS)
FILE PHOTO: A smartphone with the Netflix logo lies in front of displayed "Streaming service" words in this illustration taken March 24, 2020. REUTERS/Dado Ruvic/Illustration/File Photo(REUTERS)

Subordinate legislation: Power invoked by govt to ratify rules

PUBLISHED ON FEB 28, 2021 04:07 AM IST
These rules do not necessarily have to be debated by Parliament; they only have to be placed at floor of the house. The central government has invoked section 87 of the Information Technology Act, 2000, to issue the new guidelines
Close
The police recovered two Lenovo laptops, 15 grams gold and two smartphones from Chandrakant Bapu Salve.(HT REPRESENTATIONAL PHOTO)
The police recovered two Lenovo laptops, 15 grams gold and two smartphones from Chandrakant Bapu Salve.(HT REPRESENTATIONAL PHOTO)

Media houses’ sites to come under ambit of Section 69(A) of IT Act

By Deeksha Bhardwaj, New Delhi
PUBLISHED ON FEB 28, 2021 04:04 AM IST
Section 69 (A) of the IT Act allows the government to take action against posts and accounts that may pose a threat to public order or the interest of sovereignty and integrity of India, defence of India, security of the state, friendly relations with foreign states.
Close
Indian Air Force Chief RKS Bhadauria flew in an upgraded Mirage-2000 fighter aircraft during the multi-aircraft sortie to commemorate the second anniversary of the Balakot Operations. (ANI Photo)
Indian Air Force Chief RKS Bhadauria flew in an upgraded Mirage-2000 fighter aircraft during the multi-aircraft sortie to commemorate the second anniversary of the Balakot Operations. (ANI Photo)

IAF chief flies Mirage 2000 to mark second anniversary of Balakot operations

By Rahul Singh, New Delhi
PUBLISHED ON FEB 28, 2021 02:38 AM IST
The Indian Air Force (IAF) on Tuesday also released a video of a precision strike carried out by Mirage 2000s against a dummy target in Rajasthan to mark the second anniversary of the cross-border air strikes.
Close
In his address, Sibal expressed his unhappiness that the party didn’t choose to accommodate Azad in Parliament after his retirement.(PTI Photo)
In his address, Sibal expressed his unhappiness that the party didn’t choose to accommodate Azad in Parliament after his retirement.(PTI Photo)

Party is getting weak, say Congress 'letter writers'

PUBLISHED ON FEB 28, 2021 01:43 AM IST
Last August, the 23 leaders wrote a letter to Congress president Sonia Gandhi in which they called for “full-time and effective leadership”, elections to the Congress Working Committee (CWC), and a mechanism to guide the party’s revival.
Close
Justice Gogoi, during the event telecast on February 12, used the term “ramshackle” for the judiciary and added that one would be ending up only “washing dirty linen in court” by filing defamation cases.(AP file photo)
Justice Gogoi, during the event telecast on February 12, used the term “ramshackle” for the judiciary and added that one would be ending up only “washing dirty linen in court” by filing defamation cases.(AP file photo)

AG Venugopal refuses nod for contempt proceedings against ex-CJI Gogoi

By Utkarsh Anand, New Delhi
PUBLISHED ON FEB 28, 2021 12:51 AM IST
Responding to a request in this regard by activist Saket Gokhale, the top law officer said that the former CJI’s statements were indeed “very strong” but added that they were made “for the good of the institution” and in no manner scandalised or lowered the authority of the highest judiciary.
Close
With the 16th price hike in the current month, petrol was sold at record <span class='webrupee'>₹</span>91.17 per litre in Delhi on Saturday and diesel at <span class='webrupee'>₹</span>81.47 a litre, just 50 paise short of the all-time high.(Amal KS/ HT file photo)
With the 16th price hike in the current month, petrol was sold at record 91.17 per litre in Delhi on Saturday and diesel at 81.47 a litre, just 50 paise short of the all-time high.(Amal KS/ HT file photo)

Fuel prices record 16th hike this month

By Rajeev Jayaswal, New Delhi
PUBLISHED ON FEB 28, 2021 12:14 AM IST
Domestic fuel retailers raised petrol and diesel rates on Saturday, even as international crude oil prices fell on Friday because of the strengthening dollar. Benchmark Brent crude on Friday closed at $66.13 per barrel, down by 1.12%.
Close
Odisha reported 84 new cases of Covid-19 in the past 24 hours. (HT PHOTO) (Image used for representation).
Odisha reported 84 new cases of Covid-19 in the past 24 hours. (HT PHOTO) (Image used for representation).

In Odisha, 25 students of a technical university test Covid-19 positive

PUBLISHED ON FEB 27, 2021 11:18 PM IST
  • Officials in Veer Surendra Sai University of Technology at Burla in Sambalpur district said 25 students including a girl student tested positive for Covid-19 in the last 2 days.
Close
Sanitation workers stand in a queue to receive the first dose of vaccine in Delhi.(PTI )
Sanitation workers stand in a queue to receive the first dose of vaccine in Delhi.(PTI )

Fake Co-Win site surfaces as Centre is all set to open registration for vaccines

By hindustantimes.com | Edited by Poulomi Ghosh
UPDATED ON FEB 27, 2021 10:54 PM IST
The government has ruled out the possibility of private hospitals charging random prices for vaccines by capping the amount at maximum 250 per dose, which includes their service charge.
Close
Commerce and Industry Minister Piyush Goyal.(PTI File Photo)
Commerce and Industry Minister Piyush Goyal.(PTI File Photo)

Actively pursuing Airbus to begin manufacturing in India: Piyush Goyal

PTI, New Delhi
UPDATED ON FEB 27, 2021 10:52 PM IST
Addressing the CEOs session at the country's first Toy Fair 2021, Piyush Goyal said "I'm actively pursuing Airbus to try and get them to come to India to start manufacturing aeroplanes in India."
Close
The ruling BJP is on a high after winning all six civic corporation polls, while the Congress believe that the recent hike in fuel prices might derail the party's momentum ahead of the polls. (Representative Image)(HT)
The ruling BJP is on a high after winning all six civic corporation polls, while the Congress believe that the recent hike in fuel prices might derail the party's momentum ahead of the polls. (Representative Image)(HT)

Gujarat set for local body polls; AAP, AIMIM emerge as dark horses

By hindustantimes.com | Written by Nilavro Ghosh, Hindustan Times, New Delhi
PUBLISHED ON FEB 27, 2021 10:06 PM IST
The parties will contest for 81 municipalities, 31 district panchayats and 231 taluka panchayats, the counting for which is scheduled for March 2 as per the Election Commission.
Close
Minister of Information and Broadcasting Prakash Javadekar(AFP)
Minister of Information and Broadcasting Prakash Javadekar(AFP)

Social media content blocking provision not new, clarifies Centre

By hindustantimes.com | Edited by Poulomi Ghosh
UPDATED ON FEB 27, 2021 09:56 PM IST
The provision for the same has been there since 2009, the I&B ministry clarified.
Close
Ghulam Nabi Azad retired from the Upper House on February 15.(PTI)
Ghulam Nabi Azad retired from the Upper House on February 15.(PTI)

Ghulam Nabi Azad says 'will continue my fight for J&K statehood'

PTI, Jammu
UPDATED ON FEB 27, 2021 09:06 PM IST
"Till my last breath, I will continue my services for the nation and will continue my fight for the rights of people," Azad said.
Close
The government CVCs will inoculate for free with the central government bearing the full cost of vaccination..(PTI)
The government CVCs will inoculate for free with the central government bearing the full cost of vaccination..(PTI)

Which private hospitals are Covid-19 vaccine centres? Govt releases list

By hindustantimes.com | Written by Deepali Sharma, Hindustan Times, New Delhi
UPDATED ON FEB 27, 2021 09:05 PM IST
Around 10,000 private hospitals empanelled under Ayushman Bharat PMJAY, more than 600 hospitals empanelled under CGHS.
Close
Prime Minister Narendra Modi(PTI)
Prime Minister Narendra Modi(PTI)

News updates from HT: PM Modi to address 'Mann Ki Baat' tomorrow

PUBLISHED ON FEB 27, 2021 08:48 PM IST
Here are today’s top news, analysis and opinion. Know all about the latest news and other news updates from Hindustan Times.
Close
SHARE
Story Saved
OPEN APP